Florida Mortgage Report

Poole Does Have Something of Value to Say to Mortgage Brokers

I know I ripped on what Fed President Poole said today in his speech, but now I would like to look at the good he talked about.  That good advice can be found within what he addressed by this question:  How could better education and financial decision-making have helped people avoid these mistakes?

He broke the question down into three responses, those for borrowers, mortgage brokers and investors.  I am going to provide his statements which can be found here, followed by my own commentary.

Borrowers. Too many know too little about credit and what its costs and risks are. Starting with coursework on credit usage in elementary and middle schools and continuing with financial literacy and economics in high school would go a long way toward equipping borrowers with the information they need, or at least give them enough knowledge to ask the right questions about what they can afford and what lending terms mean.

While I agree with this statement, I lack faith in our school systems to provide a solid foundation in this area.  There is plenty of good information on the 'net when you spend a little time looking for it.  One of the best resources should be that of your mortgage professional when looking for a home loan, but that leaves the borrower on their own for other sources.  However, if you have a trusted mortgage professional you work with, they can help with other credit issues as well.

Mortgage brokers. Many have closed their doors and gone out of business through unsatisfactory lending. In the July realtor speech I mentioned earlier, I emphasized that a durable stream of profits in mortgage lending requires a continuing flow of capital from investors willing to buy the mortgages an originator wants to sell and securitize. Given the difficulty any mortgage broker faces in differentiating its own products, the best way to stand out and survive over the long term is to give outstanding service to mortgage shoppers. Turning outstanding service into future business prospects is precisely the role for reputation. A firm’s good name spread through word of mouth will pay the highest dividends over the long term. And going the extra mile by making certain that borrowers understand lending terms and are able to service those loans can cement that reputation and keep those doors open a long time.

Thank God many of these guys have left the business already and many more will likely leave this year.  That being said, not all that have left, and many that remain, still do business that screws up the borrower's financial strength.  Many that remain have just grabbed onto the latest "fad" to provide an added revenue stream at their clients' expense. I have underlined his best statements that all mortgage professionals should take to heart.

Investors. Here I want to look at individual investors, the ones you know so well. It may be true that many if not most such investors put their money heavily into mutual funds, reducing some of the risk of holding individual stocks and bonds. What would help them greatly, I believe, is a much better understanding of what their funds hold. Mutual funds are professionally managed, but the subprime fallout has hit the pros hard, too. In one example from our Federal Reserve District, two investors in two Regions Morgan Keegan mutual funds severely affected by subprime mortgage problems are suing over sharp declines in the values of their investments. As of Dec. 13, 2007, the Select Intermediate Bond Fund and the Select High Income Fund were down 47 and 56 percent, respectively. News media accounts tell of disastrous results being faced by other investors in similar types of securities. Would investors equipped with better knowledge have avoided such steep losses? More organizations should get behind efforts to improve investor knowledge.

Everyone falls into a category of investor, even if you are simply contributing to your company 401(k) or even just owning a home.  While investment professionals should be doing a better job of managing their funds, you as an individual should be watching what your fund is doing. 

I am willing to bet the vast majority (if not all) of you reading this do not know the top ten holdings in each of your mutual funds.  I am also willing to bet that those top ten holdings have a lot of "overlap" in them, meaning if one fund goes down, the other does as well.  While you may think spreading your money across a variety of funds, even fund strategies, equates to diversification, it doesn't.  Don't worry though, you are not alone as many financial professionals believe that same thing.

What about your real estate holdings?  What about even your own home?  Many financial professionals fail to take the truths of home equity into consideration and provide erroneous advice in this area as well, including advice in relation to your personal residence.  Studies have shown that financial professionals do not consider their clients' real estate holdings, especially not how the mortgage is working for them, as an integral part of their clients' financial plan.  That can lead to financial disaster.

You need to educate yourself, find a team of advisors you can trust (covering the spectrum), and develop your financial and investments plans to meet your financial goals and dreams.  Developing a team of like-minded individuals that understand the strategies and concepts will help you achieve financial freedom.

And for those in the business of real estate and financial planning, aligning yourself with those who truly understand the strategies and concepts will help you grow your business.  For the mortgage professionals, you better be up to speed on "mortgage planning" or you will become another statistic.  Understanding how money works, the strategies involved, and the essential concepts will be a requirement to survive as more and more home owners will be seeking that type of advice.

Top 5 News Stories of 2007

Taking a look back through the events of this year, there is been numerous stories across the US, so we look at the top stories of 2007..

#5 - Dow Tops 14,000 - Hard to imagine at this time, but back in July and again as recent as October, the Dow broke above 14,000.  Volatility remains in the markets.

#4 - Fed Moves - Since August 3, the Fed has been battling the worst credit crisis in nearly a decade and has moved to cut rates three times in an effort to bail out the markets and to keep the economy on track.  Our opinion is they over reacted as inflation already ticked higher, but time will tell for sure.

#3 - Toy Recalls - Recall after recall came out about Chinese products that contained lead-based paint, illegal pesticides, electric shock risks, and even laced with the "date rape" drug.  And most came just in tome for Halloween.

#2 - Record Oil Prices - While oil has backed off a little, we are still feeling the increased expenses in our wallets.  A lot of the increase came from the falling value of the dollar, along with fears of dwindling supplies and increased demand in growing places such as China.

and the #1 story, yet again...

#1 - Housing Contagion - Mortgage defaults, increased foreclosures, failing debt across the markets.  Between the US and Europe, more than $100B have been written off after downgrades occurred.  Add to that, we are likely to continue to see write off into next year.  The effects are spilling over into other areas of credit, including commercial paper.  2008 will likely see increased defaults in credit cards, auto loans, and more.

There you have it, no surprises as far as we can tell.  What does 2008 hold?  Who knows, but we can expect increased legislation of the housing industry, mortgages in particular, for good or for bad.  We can also expect to see more foreclosures, credit card defaults, and basically continued write offs for the foreseeable future.

Where do I see the Florida mortgage and real estate markets in 2008?

I see a slow improvement coming as reality sets in, particularly in South Florida.  I don't see a recovery per se.  Many in the real estate industry, both realtors ad mortgage brokers, will be bowing out under the financial strains of staying in business and not adapting to the new marketplace.  That can be good news for the consumer as most who fall out will be those you wouldn't want to work with anyway, though I am sure a few will be.

As for those who work in the industry, if you can adapt and persevere, you will be rewarded.  Slowing markets do not mean your business needs to slow also, rather it can actually increase in these times.  As for me and Solid Rock Mortgage Corporation, our plans are to grow in 2008 and beyond, still meeting our goal of being #1 in Broward County for mortgage planning services by 2012!

Call to Action by the NAMB

This is a little late, but I was overwhelmed yesterday (about 150 - 200 emails behind and needed to provide responses to them).  Anyhow, for those of you following the mortgage reform laws running through the Senate and the House, while the House's version past that was reasonable, the Senate's version is not.

So, below is what the National Association of Mortgage Brokers has asked its members to write to their Senators:

"To: All NAMB Members and National Briefing Participants

From:  Denise Leonard, NAMB Government Affairs Chair

RE:  Call to Action – “Home Ownership Preservation and Protection Act of 2007"

Thank you for participating in the national briefing today on Sen. Christopher Dodd’s (D-CT) proposed mortgage reform bill, S. 2452, the “Home Ownership Preservation and Protection Act of 2007.”  Please contact your Senator immediately and voice your opposition to the bill.

Phone Number to Senate:  202-224-3121. This is a general number that will connect you with an operator.  Ask the operator to be connected with your Senator. 

Web Address: Visit http://capwiz.com/namb/home/ and enter your state or zip code to find your Senator’s contact information. 

One of the most effective grassroots tools is a personal call from you to your Senator’s office that expresses your personal beliefs and or experiences related to the bill.  Below are very generic talking points for you to call your Senators office.  Please use them to develop your own more specific talking points regarding the bill. 

Senator Dodd proposed the mortgage reform bill, S. 2452.

1. I oppose this bill. 
2. It disadvantages small business.
3. It outlaws the way we get paid.
4. It forces us to send customers away from our business and down the street to the big banks.

It will make the housing depression worse – hurting rather than helping."

Once again, this is from the NAMB and does not necessarily reflect my own position entirely.  However, one point to be reiterated that the Senate's version opposes is that of YSP.  To read my take on it, read the following posts:

Is Yield Spread Premium Good or Bad for Consumers?
"Homeownership Preservation and Protection Act of 2007"

Federal Reserve Takes Stab at Predatory Lending

"The proposed rules, approved in a 5-0 vote by the board, are  geared to providing safeguards to the riskiest “subprime” borrowers, already painfully stung by the housing and credit debacles. The proposal is expected to apply to new loans made by all types of lenders, including banks and brokers. The plan could be finalized next year." - NY Times

I am left wondering why they only feel the need to protect "subprime" borrowers?  Why aren't they retroactively allowing these borrowers recourse for loans already made that the homeowner can prove abusive lending practices?

“Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole,” said Fed Chairman Ben Bernanke in prepared remarks. “They have no place in our mortgage system,” he added.

No Kidding.  That is an understatement if I ever heard one.  But let's look at what he proposes:

• restricting lenders from penalizing certain subprime borrowers — those with tarnished credit or low incomes — who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase. (My comment:  Means prepayment penalties allowed, so long as they expire 60+ days prior to rate reset)
• forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance. (My comment:  I know of many cases where lenders have screwed up the escrow leaving the homeowner an increased mortgage payment they can't afford the next year)
• barring lenders from making loans when they don’t have proof of a borrower’s income. (My comment:  This should have been done before.  No doc loans allowed too much "risk" in my opinion, though there were some justifiable ones done)
• prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value. (My comment:  So, anyone who is in business for themselves that cannot prove "enough" income gets the boot.  That is a slap in the face for small businesses across the country.  Now, in regards to full doc loans, my comment is: Well duh.  Isn't that what the underwriter was supposed to do in the first place?)

So, what is this move really going to do?  Mostly nothing.

It really doesn't address abusive lending practices much.  Requiring escrows, while mostly helpful, doesn't truly protect the borrower from increased payments, merely helps ensure the lender is protected (makes insurance and tax payments on time).  Proof of income may not be enough to meet the normal  2 year requirement and anyone who owns a business knows tax forms do not show "reality", especially when the business owner can legally be aggressive with their tax reductions.

The bottom line is that this is yet another misplaced "Band-Aid".

Fannie and Freddie to Go Jumbo? Is the Government Going Insane?

"Stop the insanity" is the first phrase that comes to mind after reading this headline.  Why?  Think about what is truly happening in the mortgage market and where all of this is headed.

Basically, the government is trying to overtake the mortgage market through endless regulation.  They feel they must do something or else and are succumbing to pressures to "bail out" a market that was in desperate need of a correction to bring itself back to reality.

But is "over-regulation" what we truly need?  Don't take me wrong here as I am all for added regulation which protects the consumer, but when the government steps in, they tend to overdo it.  Allowing Freddie and Fannie to go into the Jumbo market, even if only temporarily, is one case in many of how the government is throwing Band-Aids on the gaping wound.  Sure it stops the bleeding some, but basically just prolongs death.

Paulson and Bernanke are doing everything in their power to Band-Aid the mortgage market.  Bernanke and crew are cutting the Fed Funds Rate and Discount Rates even with inflation showing signs of growing and the economy slowing.  He is giving stagflation an "open door".  Both are looking for any changes they can make or get other parts of the government to make in order to "save homeowners from foreclosure." 

Who stands to win though?  The homeowner?  Not likely.

The real winners in this game they are playing are the lenders and other financial institutions that are struggling due to their risky lending practices or over leveraged positions on mortgage backed securities.  Citigroup, Wachovia, Bank of America, Washington Mutual, Countrywide, the list goes on and on.  All are shouldering huge losses and will likely continue to do so into 2008.  They "need" the government to do something.

The homeowner's facing foreclosure, for the most part, deserve to be foreclosed upon.  While the media and government play that the typical foreclosure is a subprime borrower facing increased mortgage costs due to their payment adjusting, that represents the minority, yes the minority of foreclosures out there.  Factor in that the government portrays the mortgage professional that sold them the loan as an unscrupulous one and reality shrinks even further from the truth.

Again, don't get me wrong.  There are unscrupulous originators and there are homeowners that truly should be helped somehow, but they are the smallest percentage of the pie. 

So, why is the government willing to screw up the entire industry over the few?  Well, because that is what they do.  They disguise "bail outs" as "homeowner salvation plans".  They usually go out of their way to appease the minority groups on an issue, while sacrificing the desires of the majority groups. (Note:  I am not talking about racial or ethnical issues here, so don't even go that route in any comments please).

"Homeownership Preservation and Protection Act of 2007"

I have been reviewing the proposed bill formulated by Senator Dodd and, once again, there are provisions that will screw the consumer more than protect them.

Please keep in mind that I am not against legislation that works in favor of the consumer, but provisions in both the House's "Mortgage Reform and Anti-Predatory Lending Act of 2007" and this bill will actually hurt the consumer by making it harder to obtain potentially the best loan solution for them.  Both bills do have some good provisions, but its the harmful ones, such as outright prohibiting Yield Spread Premiums (YSPs) from being used.

In the House's "Mortgage Reform and Anti-Predatory Lending Act of 2007", there was an amendment to allow YSP when used to pay for justifiable fees as part of paying for the closing costs associated with the loan.  The Senate's "Homeownership Preservation and Protection Act of 2007" does not allow for that on many beneficial types of loans.  There are similar limitations on other types of loans.

When it comes to the use of YSP in the Senate's version, it is prohibited on all subprime and "nontraditional loans".  Nontraditional loans include interest only loans, thereby minimizing the access to a proven beneficial program.  Strangely enough, for high cost loans, YSP is allowed so long as it is not used to "steer" borrowers into a high cost loan when they can qualify for a better loan.  (There may be a few times when these limits will actually force borrowers into the high cost loan).

The Senate version also adds the requirement to escrow for any subprime or nontraditional loan.  While for subprime this is a good thing, for interest only loans it is not.  Why?  Most homeowners who use the interest only loans are financially savvy and would be better off waiving escrows.  Another limitation that would hurt many homeowners.

Limitations on low and no documentation loans may be excessive.  In fact, it leaves the Federal Reserve in charge as to what is deemed appropriate and they will likely not allow much.  This puts severe strains on small business owners and commission based workers that need the stated income programs to qualify.

So, once again the government is going after implementing legislation that will ultimately harm the consumer.  Also, as I mentioned before, there are good provisions, even many aimed at limiting mortgage brokers from screwing their clients for money which I agree with.  The points I made here are targeting provisions that will do more harm than good for the American homeowner.

Foreclosures Hit New Record...Well, Duh

"The rate of loans entering the foreclosure process during the third quarter, as well as the percent of loans in the foreclosure process during that time, were at the highest levels in the history of the Mortgage Bankers Association's quarterly delinquency survey, the group reported on Thursday."

That is how the article in MarketWatch started.  This comes as no surprise to most readers as I have mentioned that foreclosures were going to get worse.  I have also mentioned that it wouldn't be just a "subprime" thing.

Guess what.  It isn't.  The more interesting numbers hidden in the new release is that of the percentage of prime loans, you know those with credit not worth screwing up. 

"Adjustable-rate loans are performing "much, much worse than their fixed-rate counterparts," he said. Subprime ARMs accounted for 43.0% of all new foreclosures during the third quarter, even though they make up just 6.8% or all loans outstanding. Prime ARMs made up 18.7% of the foreclosures started, and make up 14.5% of all outstanding loans."

First off, if Subprime ARMs accounted for just 43% of all new foreclosures, what about the other 57%?  Since virtually all subprime loans are ARMs, that would leave the vast majority, if not all, as Prime loans!

Let's also look at the numbers and find another hidden gem.  Total ARMs, including Prime, represent a total of 61.7%.  That means that over 1/3 of all foreclosures, 38.3% in fact, are fixed rate mortgages!!!!

That is a far cry for the facts the media and the government have been portraying.  They are painting the picture of a homeowner being foreclosed on because they have bad credit and are in an adjustable rate mortgage that will reset beyond what they can afford.

As is typical, reality is different as we can clearly see, around half actually have (or had) good credit and nearly 40% are in fixed rate loans!!!

This is a "Be Careful What You Wish For" Post

Recently, I began asking for more testimonials, something I usually do not do as I would like to think I would receive them when my services warranted.  Then I read something, somewhere that showed statistically that if you do not ask, you will not receive.  Well, being the numbers kind of guy I am, I realized quickly I needed to start asking.

Well, I have not mastered the art of asking for testimonials, but decided to ask one of the many non-clients that have come to me for advice to provide a testimonial if he chose to.  To say I was blown away is a major understatement as I was not prepared for the degree of impact I have had on this gentlemen's life.

Here is the exact testimonial, including his name, used with his permission...

"While reading the Active Rain real estate blog online, I stumbled upon some words of wisdom that made good common sense.  Those words were written by Mr. Robert Ashby.  I took the time to visit Mr. Ashby's website, found an email address,  and wrote a letter explaining my circumstances in hopes that he could lend some more solid advice.  Mr. Ashby found the time to respond to my request while he was on vacation, I couldn't help but think this was the type of person who truly cares about the advice they're giving.  That initial contact occurred over 1/2 year ago, and I've maintained loose contact with Mr. Ashby since then, and he always responds to my questions with what I still consider good solid advice.  I consider Mr. Ashby a great asset in my education and understanding of how to utilize my mortgage debt to create financial well-being. It should be noted that while Mr. Ashby works out of Florida, I live in the southwestern United States, and am NOT a client of Mr. Ashby's, yet he always listens to my concerns and responds in a timely fashion.  I wish my local mortgage lenders were half as helpful.  I look forward to my continued correspondence with Robert and consider him an "Advisor for Life".  Thanks Robert."

- Justin R.
Las Vegas, NV

(I underlined the one sentence for emphasis)

How to Determine Whether Your Loan Officer is Reputable

In slower markets, some loan officers may feel pressured to close deals that      aren’t in the homeowner’s best interest. In order to avoid getting into difficult and financially compromised positions with their mortgages, borrowers are well advised to be acutely aware of the signs of a responsible loan officer when selecting a mortgage professional.

First, look for a Mortgage Planner whose values are focused on helping individuals to achieve their financial goals in both the fastest and the safest way possible. A reputable Mortgage Planner will show you the numbers associated with the proposed loan and provide you with concrete information that backs up his or her claims. Review all of the numbers. If they don’t add up, ask for clarification. If your loan officer can’t or won’t answer your questions, move on--without the loan.

Secondly, a responsible Mortgage Planner will present you with financial information that goes beyond the point of the transaction, and will illustrate the total cost of the loan over time. If your loan officer is focusing only on rates and fees, you may be working with someone who’s looking out for his or her own best interests, not yours.

Responsible Mortgage Planners will also tailor their strategies to fit your unique situation. In other words, they always take your personal financial goals into account. No one should try to place you into a loan without knowing the intricacies of your personal financial situation.

Finally, if your loan officer is advising you on issues other than mortgages, you could be working with someone who is compromising your best interests. Issues like investment rates of return and real estate appreciation aren’t the areas of expertise for the vast majority of mortgage professionals and should be left to the professionals who have training and direct experience in those areas.

When seeking a loan officer, look for someone who specializes in mortgage planning, which is the process of evaluating a borrower’s unique financial situation and advising the borrower on a loan that best suits his or her individual needs and goals. If your loan officer is trying to put you into a loan without evaluating how that loan will effect your entire financial situation--including debt management, tax benefits, investment goals and net worth--it’s quite possible that you’re only getting half of the picture.

The bottom line is that your mortgage representative should always be looking out for your best interests, regardless of market conditions.

Martinez Signs Onto Bill to Help Homeowners, Making it Easier to Draw Money From 401(k) or IRA to Avoid Foreclosure

This is one bill we do not support.  While it may sound good, how much help are you really doing?  The odds favor that the homeowner will be hurt more in the long run financially than simply going through the foreclosure process now and moving on.

Financial planners will tell you to tap retirement accounts as a last resort.  Many financial planners and other "experts" will tell you that your home is your retirement "nest egg."  We disagree with those assumptions as trapping money in your home may cause you more financial harm, including increasing chances of foreclosure.

Helping Floridians (and others) to mishandle their finances, even making it "easier" for them to do so, will create more poverty stricken retirees in an already dismally prepared society. 

Why risk your retirement like that to put a Band-Aid on a gaping wound?  Why not exercise fiscal discipline and proper manage your debt and equity positions to maximize your overall financial health?